20 quick facts from FCA's retirement outcomes review

Earlier this week the Financial Conduct Authority published two big documents as part of its Retirement Outcome Review (ROR). From investment pathways to consumer nudges, here are all the key points

This week, the Financial Conduct Authority (FCA) issued its final policy statement on its Retirement Outcomes Review (ROR), which commenced in June 2016.

The papers - entitled Retirement Outcomes Review: feedback on
CP18/17 and our final rules and guidance, and CP19/5: Retirement Outcomes Review: Investment pathways and other proposed changes to our rules and guidance - detailed a number of key measures which the FCA wants to use to change savers' experience of the retirement market. 

We have summarised the report in bitesize chunks! Click on to read more. 

This week, the Financial Conduct Authority (FCA) issued its final policy statement on its Retirement Outcomes Review (ROR), which commenced in June 2016.

The papers - entitled Retirement Outcomes Review: feedback on
CP18/17 and our final rules and guidance, and CP19/5: Retirement Outcomes Review: Investment pathways and other proposed changes to our rules and guidance - detailed a number of key measures which the FCA wants to use to change savers' experience of the retirement market. 

We have summarised the report in bitesize chunks! Click on to read more. 

Conclusion:

The FCA is not budging on its stance on risk warnings. 

What the report said:

'While we received no substantive comments on the content of the cost benefit analysis [CBA], one respondent did question the overall benefits of retirement risk warnings in relation to their costs.'

'While we have made some refinements to our proposals in this policy statement, we do not consider that these changes will significantly affect the figures set out in the CBA. We have therefore concluded that the CBA set out in CP 18/17 still applies.'

Conclusion:

'Wake up' packs, whereby consumers are notified of their pension options prior to their retirement, should not be delayed any later than age 50.

What the report said:

'As consumers can access pensions guidance at age 50, we consider it would be unhelpful to delay the first ‘wake‑up’ pack any later than this. Firms can provide these packs sooner if they feel this would benefit consumers.'

Conclusion:

Putting a projected retirement income or savings goals on a consumer wake up pack is not a good idea. 

What the report said:

'We have not included a projected future income or savings targets as we consider this could cause confusion for consumers.'

Conclusion:

Providers will be left to their own devices to decide what their risk warnings should look like. 

What the report said:

'We do not consider it would be helpful to mandate the wording of, or which generic risk warnings should be given, as this would prevent firms from producing warnings appropriate to their consumer base.'

Conclusion:

Respondents to the FCA's consultation on guidance signposting 'mistinterpreted' its recommendation that Pension Wise should be clearly signposted. 

What the report said:

'Some respondents misinterpreted our proposals. Several respondents thought we wanted firms to tell consumers when the next available [Pension Wise] appointment was. One respondent thought we wanted to remove references to advice.'

 

Conclusion:

The FCA is going to model potential guidance 'nudges' with the new Single Financial Guidance Body and then consult further on proposals.

What the report said:

'The Financial Guidance and Claims Act 2018 requires us to make rules for pension providers. These ensure that consumers have received appropriate pensions guidance or opted out of receiving guidance before they proceed with an application to access or transfer pension savings. We will test potential approaches with Government and the Single Financial Guidance Body and will consult on rule requirements in due course.'

 

Conclusion:

The FCA will not prescribe a list of questions that firms offering enhanced annuities must ask their customers before quoting a price. However, it will issue guidance around discussion areas between customers and providers.

What the report said:

'We do not consider that it would be appropriate for us to give firms a set of questions to ask consumers to establish eligibility for an enhanced annuity. However, following feedback, we are adding guidance. This will set out a number of major health and lifestyle areas that firms may consider asking questions on to assess eligibility.'

'This list is not exhaustive, nor does it set a minimum level. Firms can ask more detailed questions if they wish. The factors listed are based on the current set of questions the Money Advice Service [MAS] Annuities Comparator Tool asks, although we recognise that these may change over time. It remains firms’ responsibility to ask sufficient questions to establish eligibility and generate a market‑leading enhanced annuity quote. There is also text in the prompt which will direct consumers to the MAS tool so that they can get further information.'

 

Conclusion:

The FCA will proceed with its proposal that advice should no longer be specifically mentioned in information given to customers entering drawdown or getting a pension income for the first time, and instead replace that with a reminder about 'reviewing decisions.'

What the report said:

'We propose to require that communications to clients no longer mention the option of getting advice, but include text on reviewing decisions and investments, and the need to consider a review of the pension decisions they have made.'

Conclusion:

The FCA will proceed to require providers to present customers entering into drawdown with a clear cost description in pounds and pence.

What the report said:

'Key elements of the front page summary include figures about charges being presented as a cash amount (in pounds and pence). Research has shown  this presentation is the best at helping consumers assess the cost of drawdown. We also proposed that firms should present drawdown fey features information [KFI] using calculations in real terms. Real term calculations present future outcomes in terms of what money would buy today. This makes projections of future annual income directly comparable with the purchasing power of people’s current income. This approach would not prevent firms from providing, on request, an optional, additional KFI prepared in nominal terms.'

Conclusion:

Too many people are getting their tax free cash without getting enough help with drawdown. 

What the report said:

'Many consumers were solely focused on taking their tax-free cash and were insufficiently engaged with the decision around how to invest the remaining funds that moved into drawdown. Our research found that around one in three consumers who had gone into drawdown since the introduction of pension freedoms were unaware of where their money was invested. Many others only had a broad idea.'

 

Conclusion:

Larger providers will have to present options for non-advised drawdown customers according to their broad goals. 

What the report said:

'Our current rules don’t prevent drawdown providers from offering investment pathways. But our research suggests that very few are doing so. Our proposals will, therefore, change the options available to the vast majority of non-advised consumers entering drawdown.

'Non-advised consumers will be able to choose how to invest their drawdown pot on the basis of the objectives they have for that money. Larger providers will be required to offer single investment solutions that correspond to each of these objectives, while smaller providers will be able to refer consumers to a drawdown comparator tool provided by the Single Financial Guidance Body.'

 

Conclusion:

Consumers should not be allowed to be defaulted into cash.

What the report said:

'We are now consulting on proposals requiring providers to ensure that consumers invest in cash only if they make an active decision to do so. We propose that these providers must also give consumers warnings about the likely impact of investing in cash on their long-term income, both when they enter drawdown (or transfer funds already in drawdown into a new product) and on an ongoing basis.'

Conclusion:

The FCA has undertaken testing to check consumers' understanding of the objectives for investment pathways. 

What the report said:

'We have tested consumers’ understanding of the objectives for investment pathways. We have undertaken both qualitative and quantitative testing. The quantitative testing involved 1,480 participants. The results of this testing have informed our approach.'

Conclusion:

Providers must offer investment pathways according to the following consumer objectives.

What the report said:

'The four objectives we propose are:

Option 1: I have no plans to touch my money in the next 5 years.

Option 2: I plan to use my money to set up a guaranteed income
(annuity) within the next 5 years.

Option 3: I plan to start taking my money as a long-term income
within the next 5 years.

Option 4: I plan to take out all my money within the next 5 years.'

Conclusion:

The FCA will not prescribe precisely what each investment pathway for each option should look, and will allow providers - where relevant - to use pre-existing products and offerings for each solution.

What the report said:

'In summary, our proposed rules: do not prescribe the pathways solutions or risk profile providers; should use for each investment pathway objective; allow providers to offer pre‑existing investment solutions for any of the investment pathway objectives where they meet the relevant objective.'

Conclusion:

Advisers will have to include investment pathways in their suitability assessments for clients entering drawdown.

What the report said:

'Existing requirements in our handbook will mean advisers must consider available pathways solutions when they make their suitability assessment for their retail clients who are making a decision about drawdown funds,' the FCA said. 

'We appreciate a tailored solution will be more suitable for many advised consumers than a pathways solution. But we also recognise there will be situations where a pathways solution may be more suitable than a tailored solution – for example, where the consumer has a small pot. We do not believe that considering pathways solutions in suitability assessments would be onerous for advisers, or that it should increase the costs of advice for consumers.'

Conclusion:

Drawdown providers have expressed concern  the aims outlined for each investment pathway may be too broad. 

What the report said:

'There was high-level support from most respondents for the 3 draft objectives in CP18/17. But there was also widespread concern – particularly from providers – that they may be too ambiguous and/or too broad. This might mean non-advised consumers would struggle to understand the objectives, or that providers would struggle to design pathways solutions to meet them.'

Conclusion:

Getting an adviser was clearly not top of the to-do list for non-advised drawdown customers. 

What the report said:

'Our qualitative research aimed to assess consumer understanding of the proposed investment pathway objectives and help us assess whether consumers can select the objective that is most appropriate for their needs.

'Our provider undertook 15 in-depth interviews with participants aged 54 to 66. None had used – or was planning to use – a regulated adviser for their drawdown investment decision.'

 

Conclusion:

Providers will have to specifically clarify if any adviser remuneration has been paid out of their products.

What the report said:

'When disclosing actual pension charges, we will require firms to clarify if any actual adviser remuneration has been paid out of the product. Where there is no known adviser remuneration, we will require firms to state that adviser remuneration is not included in the charges figure provided.'

 

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